Market Access: A Key Determinant of Economic Development in Sub-Saharan Africa

Sub-Saharan Africa (SSA) is home to the world’s poorest countries. The region’s geographical disadvantages are often viewed as an important deterrent to its economic development. A country’s geography directly affects economic development through its effect on disease burden, agricultural productivity or the availability of natural resources. However, the new economic geography (NEG) literature, initiated by Krugman (1991), highlights another mechanism through which geography affects prosperity. A country’s location not only determines its physical geography; it also pins down its position on the globe vis-à-vis all other countries (its relative geography), hereby determining a country’s ease of access to international markets. The better this market access is, the higher a country’s level of income. The importance of market access in shaping global and regional patterns of economic development has not gone unnoticed in policy circles: it was the main topic of the World Bank’s 2009 World Development Report.

Does market access matter for economic development in Sub-Saharan Africa?SSA is only a marginal player on the world’s export and import markets. Since 1970, the region’s share in global trade has declined from about 4% to a mere 2% in 2005 (IMF, 2007). Increasing SSA participation in world markets, as well as stimulating trade relations between SSA countries, is viewed as very important to its future economic success. Especially, expanding the (exporting) manufacturing sector is seen as crucial to the region’s chances on future economic success (Collier and Venables, 2007; World Bank, 2007). It has been one of the key ingredients of the sustained growth witnessed in the rapidly developing Asian countries.

The main contribution of our paper, “Economic Geography and Economic Development in Sub-Saharan Africa,” is to empirically establish the importance of SSA market access, and market access for manufactures in particular, for its economic development over the last two decades. We first construct yearly measure(s) of each SSA country’s market access over the period 1993-2009, that are firmly based in NEG theory. Next, using our constructed measures of market access, we estimate the impact of market access on GDP per worker. Hereby, we distinguish explicitly between the importance of SSA market access to other SSA markets and to markets in the rest of the world (ROW).

Our main finding is that market access is indeed an important determinant of SSA’s economic development. This effect is still lower than that found for other parts of the world, but our results do show that the importance of market access has increased markedly in SSA over the last two decades. The figure below serves to illustrate this: countries with a higher market access generally have a higher GDP per worker. This relationship is especially apparent during the last decade (2001-2009).

These findings are robust to controlling for many other variables affecting economic development (most notably human capital, institutions, natural resource dependence, and other more standard measures of a country’s geography). In our most conservative specification, we find that a 1% increase in a SSA country’s market access is associated with a 0.03% increase in its GDP per worker. Interestingly, when further unraveling this finding by distinguishing between the importance of access to other SSA markets and to markets in the ROW we find that access to other SSA markets is particularly important. A 1% increase in a SSA country’s access to other SSA markets is associated with a 0.05% increase in its GDP per worker. By contrast, we are unable to find a significant impact of market access to the ROW.

Our findings go against those proclaiming that intra-SSA economic linkages are too weak and under-developed to be of importance to SSA countries. They support the view that stimulating intra-SSA manufacturing export markets is very important for the future viability of SSA countries that want to become less dependent on natural resource revenue. Indeed, manufacturing already dominates intra-SSA exports (UNCTAD, 2009). Moreover, intra SSA-exports have increased faster than SSA-exports to the rest of the world in recent years (Easterly and Reshef, 2010; ARIA IV).

We note that the absence of a significant effect of access to markets in the ROW should not be taken as saying that access to markets in the ROW does not matter for SSA. SSA exports to the ROW are dominated by natural resources (for more than 75%). The fact that market access to the ROW for SSA manufacturing products is not significant, does not say much about the importance of e.g. lowering tariffs on SSA agricultural or mining products for SSA countries’ economic development. It can also be taken as an indication that, to date, most SSA manufactures are not yet finding their way to markets outside the (sub)continent.

Improvements in market access stimulate SSA economic developmentBased on our findings, we can also assess the impact of improvements in policy-relevant variables on a country’s overall market access, and their subsequent contribution to overall economic development levels. Overall, we lend support to the view that current efforts to improve SSA market access by investing in infrastructure (Sub-Saharan African Transport Policy Program or The Infrastructure Consortium for Africa), by alleviating the burden of landlocked countries (the Almaty Programme), or by increasing effective intra-SSA integration (African Union), will, by improving SSA countries’ access to foreign markets, have strong positive effects on SSA economic development.

More specifically, halving distances to all trade partners (a rough proxy for improving SSA countries’ connectivity through e.g. cross-border infrastructure projects, or more effective border procedures) results in the largest improvement in GDP per worker, raising it by about 6%. Next comes alleviating a landlocked country’s burden of having no direct access to the coast (raising incomes by almost 5%), followed by a 4% increase in GDP per worker as a result of a one standard deviation improvement in a country’s own infrastructure (e.g. corresponding to upgrading Ethiopia’s infrastructure to resemble that in Botswana).

Overall, our results are a strong reminder that distance or relative geography matters for economic development. Despite room for (policy-induced) improvements in market access, the (economic) remoteness of many SSA countries remains an important burden on their economic development prospects. Alleviating this burden by investments in (cross-border) infrastructure or improving international cooperation among SSA countries, is an important way to stimulate economic development across the continent.